Ask Mike:
What is a Zone?

Question:

Mike,

Could you please explain what is meant by the 'Zones' you reference in your technical analysis?

Thank you,

Stuart K from Oxnard, CA

Mike's Response:

Hi Stuart,

My technical theory is has many components, including trend lines, moving averages, crossing percentages, Zones, Industry and Sector technical support, resistance levels, etc.

Your question has to do with one of these components: Zones.

First, I will define the Zones, then tell you how I use them.

A Zone is 25% of a stock's lifetime highest high less the stock's lowest low, adjusted for splits.

For example, let's assume the highest high for a stock is $50 and the lowest low is $10. Now, this stock could have split several times or had various distributions in its lifetime. It could have traded for as high as $150, but adjusted for splits and distributions, the highest high is $50.

So, for this stock a Zone would be 0.25 x (50 - 10) = 0.25 * 40 = 10.

In this example, Zone 1 would be from $10 to $20 Zone 2 would be from $20 to $30 Zone 3 would be from $30 to $40 and, Zone 4 would be from $40 to $50.

These Zones are recalculated each week based on splits, new highest highs, distributions, etc.

I have technical trading rules based on which Zone the stock is current trading in. If a stock is giving a new buy signal, for example, and is moving from Zone 1 into Zone 2, that buy signal is stronger than a buy signal for a stock that is in the middle of Zone 4 and moving higher in Zone 4.

Another rule I have is to never short a stock that has given a new short sell signal in the lower half of Zone 1. There are specific trend patterns that tend to happen somewhat differently, depending on which Zone the stock is currently trading in.

Thanks for the question, Stuart.

Regards,

Mike